How to Build a Good Credit History

One of the most important aspects of your finances is your credit history. A good credit history can save you money on the interest you pay for loans as well as influence other aspects of your financial life. Your credit history isn’t just about getting a good deal on your next loan. It can also influence whether or not you are approved for cell phone service, the premium you pay for your auto insurance, and even whether or not some employers hire you.

For better or worse, credit history is an important part of our society. We tend to¬†judge others by what’s in a credit history — even if the assessment may only be peripherally related to financial habits. Ideas of general responsibility, capability, and more are based on what’s in a credit history. Building a good credit history requires planning and discipline.


Photo by Andres Rueda via Flickr

First of All, You Need a Credit History

The whole point of a credit history is to evaluate your ability to handle credit. To build a history, it is vital that you use credit in some way. There are ways to build up your credit score without credit cards, and there are alternative ways of establishing credit, but the fastest way of creating a credit history remains borrowing money and paying it back.

One of the easiest ways to start a credit history is to get a credit card and start using it. This can be tricky, and you need to be careful. Credit cards are seductive. If you are irresponsible, you could end up maxing our your card and carrying a balance. This can damage your credit history — especially if you get in over your head and start missing payments. It would be better to have no credit history than a severely damaged history.

Even though it takes more time you can also use installment loans like auto loans to help establish a credit history. As you pay down these loans you begin to establish a history. You can also speak with prepaid debit card providers, utility companies, and even your bank about how they report your behaviors. You might be able to get them to report your good habits to one of the three consumer credit agencies.

Making Sure Your Credit History is Good

It’s not enough to have a credit history; you have to make sure that it’s a good credit history if you want the best benefits. A good credit score, which reflects a good credit history, can be the way to let others know that you are responsible and capable — especially in money matters.

As you build your credit history, pay attention to the following items:

  • Make payments on time and in full: On-time payments is one of the most important aspects of your credit history. Make sure you pay your bills on time. Even though your utility company may not report your on-time payments to the major credit bureaus, it will begin reporting if you start missing payments, are habitually late, or make only partial payments. Additionally, Experian has started adding rent payment to its credit reporting so your good behavior in this area will benefit you going forward.
  • Keep debt low: Even though you need debt to establish your credit history it doesn’t mean you need a lot of it. Limit your debt to a small portion of your finances. It’s good to make sure you are not using more than 50% of your available credit line on credit cards, and it is even better to keep your utilization below 30%.
  • Have a mix of debt: Being able to show that you can handle revolving debt (like credit cards) as well as installment debt (like auto loans) is important.
  • Stay away from “toxic” debt: Major bank card vs. department store credit card is one way that your credit history categorizes debt. Bank cards are more positive than store cards. However, having a store card won’t harm you too much. What can be a red flag is if you have a payday loan or title loan in your history. Try to avoid these types of loans when possible.

With discipline, spending only what you have, and paying your balances off, you should be able to build a good credit history that will help you in the future.

About the Author

By , on Apr 5, 2011
Miranda Marquit
Miranda is a professional personal finance journalist. She is a contributor for several personal finance web sites. Her work has been mentioned in and linked to from, USA Today, The Huffington Post, The San Francisco Chronicle, The New York Times, The Wall Street Journal, and other publications. She also has her own personal finance blog: Planting Money Seeds.

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Leave Your Comment (4 Comments)

  1. Fitih says:

    Thanks, Miranda!nAs an immigrant who is new to the system (less than two years) this is a great piece of advice!! so simple to understand and practical. I researched a lot before I got one card and so far my credit score is very good! It will be even better since I will start earning 6 figures in the near future.. :)

  2. Trey Markel says:

    All of the above are great points. If may add a few myself, monitoring your personal credit is vital. I didn’t believe it for a long time, but freecreditscore.com offers a great service where it monitors your personal credit and sends you notifications if anything on all three of your credit reports has changed.

    I had $38 dollars in collections and it caused my credit score to float around 590. I had no idea I was even in collections. I signed up with freecreditscore.com, paid off that $38 dollar collection account and my credit score went from a 590 to 680 literally overnight. The service is $14 bucks per month.

    most creditors will allow you to be 15 days late on any payment, just don’t be 30 days late because that will show up on your credit score for the next 2 years. Find some sort of personal credit monitoring service. It’s too cheap to not take advantage of it.

  3. Hunter says:

    Miranda: I posted a similar piece March 26. I appreciate your perspective. Thanks, Hunter.

  4. krantcents says:

    Good points! So simple, yet so easy to mess it up. A negative credit history can affect your ability to get some jobs.

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